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How to File Taxes as an Independent Contractor: The Complete Guide

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Anyone who works in a company is required to file and pay their taxes. However, as an independent contractor, doing it can be a bit more complicated.

If you’re struggling with the self-employment tax, you’ll be happy to know that you’re in the right place. 

In this article, we’ll show you how to file as an independent contractor so you can pay your dues and handle tax forms with confidence.

Who Qualifies as an Independent Contractor?

To qualify as an independent contractor, one should have the following criteria:

  • Specialized skills or knowledge that allows you to have control over your work and schedule
  • Multiple clients available at any given time to have a stable income
  • Responsible for filing your income and self-employment tax to the IRS
  • Not considered a full-time worker

These apply to the following people:

1. Gig Workers

Gig workers, also known as gig economy workers, work on short-term or on-demand projects.  

They’re typically not labeled as full-time employees of a single employer/company. In most cases, they work for multiple clients simultaneously.

Such workers find most of their work opportunities through digital platforms or apps designed to connect them with their clients.

2. Freelancers

A freelancer is a type of gig worker who offers their services to clients on a project-by-project basis. They’re professionals with various skill sets like:

  • Writing
  • Designing
  • Editing
  • Translation
  • Marketing
  • Programming
  • Consulting

Unlike gig workers, who are more flexible to work any type of job, freelancers often offer specialized services. 

3. Self-Employed People

A self-employed person is an experienced gig worker or freelancer who has honed a particular skill enough to start a business out of it. They often have one or more employees, and the success of their business is often their sole responsibility. 

Because of that, they have a higher financial risk compared to gig workers and freelancers. 

Gig workers, freelancers, and self-employed people are all responsible for their expenses and need to pay income and self-employment taxes. Also, they typically don’t have access to full-time work benefits like medical insurance and paid vacations. 

How Does the IRS Know You’re an Independent Contractor?

The IRS has various methods of determining whether someone is an employee or an independent contractor. Among those are:

  • Behavioral control: The IRS looks at how much control a company has over a person’s work. If the company is constantly telling the worker what to do, then they are most likely an employee. Alternatively, if the worker is directing and controlling the flow of work, they are most likely an independent contractor. 
  • Financial control: Much like behavioral control, the IRS also notices how much a worker is provided with tools and equipment to finish their tasks. Employees are typically given the necessary tools to handle their jobs, while independent contractors often have their tools ready.
  • Contract agreements: If a contract between a company and a worker is present, the IRS will track the details of that contract. The IRS even looks beyond the actual written content in the contract. For example, even if the contract designates someone as an independent contractor, the IRS may still reclassify them as an employee if they’re receiving benefits, for example.
  • Income Tax Reporting: If you’re an independent contractor, your client should provide you with a Form 1099-MISC, reporting the income paid to you. It would then be your responsibility to report this income on your income tax return as self-employment income. Failing to do so could lead to legal consequences. 

How Do You Establish Yourself as an Independent Contractor?

To establish yourself as an independent contractor to the IRS, you should go through the following steps:

Step 1: Choose Your Business Structure

You need to decide the ownership of your business:

  • Sole proprietorship
  • Limited liability company
  • Partnership
  • Corporation

Each choice affects your liability taxes.

Step 2: Obtain a License and a Tax ID Number

In most cases, your state or local government will require a business license to start a business. You’ll also need a federal tax ID number from the IRS. 

Step 3: Obtain an Employer Identification Number (EIN)

You’ll need a 9-digit number from the IRS called the EIN. It’s considered the social security number of your business, and it’s used for income tax reporting purposes. 

Step 4: Get a Taxpayer Identification Number (TIN)

This is only applicable if you’re a business owner. If you’re a sole proprietor, your social security number can act as your TIN. 

You can obtain a TIN through the IRS website by providing some personal information. 

Step 5: Receive Form 1099-MISC  

Should your clients pay you more than $600 during the tax year, they have to provide you with a Form 1099-MISC.

This form reports how much they paid you, and you’ll have to use it when you file your taxes. 

Independent Contractor vs. Employee for Taxes

vector graphic showing an illustration of people trying to become an independent contractor

Independent contractors are responsible for paying their self-employment tax since they’re not hired for a full-time job. Contractors have to pay both the employer and the employee portion of Social Security and Medicare taxes.

They also have to pay estimated taxes throughout the year and sometimes file a quarterly return

Employees don’t have to worry about any of that. That’s because all their federal income taxes are already withheld from their paychecks by their employer.

They also don’t have to pay estimated income tax, and they file a federal tax return once a year. 

How Much of Your Paycheck Should You Save as an Independent Contractor?

As an independent contractor, a good rule of thumb is to save around 25-30% of your monthly paycheck to avoid any surprises at tax time. 

This will help you pay the income tax, self-employment tax (such as social security taxes), and estimated taxes. 

Can You Claim Business Expenses as an Independent Contractor?

Independent contractors can claim business expenses on their tax return since the IRS considers such contractors to be self-employed. You may deduct up to 20% through the qualified business income deduction if you meet the criteria.

Such business expenses include:

  • Office expenses: Rent, furniture, utilities, and various office supplies.
  • Travel expenses: The cost of transportation, lodging, and meals.
  • Business equipment: The cost of computers, software, printers, and various other equipment.
  • Advertising and marketing expenses: Monthly costs dedicated to promote your services.
  • Professional development expenses: The cost of tuition, fees, courses, and other expenses related to education and business-related improvement.

You should keep a detailed record of all your business income and expenses to avoid losing more of your taxable income by mistake. A tax professional can help you keep track of all the relevant paperwork.

How to File as an Independent Contractor

The following steps will show you how to file your federal income taxes as an independent contractor:

Step 1: Gather the Necessary Documents

The documents you’ll need to file your taxes are the 1099-MISC, which is issued by your clients.

Also, should you choose to file your taxes by mail, you’ll need the IRS Form 1040, which will also help you calculate the estimated tax payments. You’ll also need Schedule C, which is the form you use to report your income and expenses from your self-employment

Step 2: Decide on a Tax Filing Method

You can file your taxes electronically or by mail. If you choose to file them electronically, you should use the IRS free filing program

You also have the option of paying using phone calls or using direct deposit. We’ll talk about this more in the following section. 

Step 3: Do Some Calculations

You’ll need to calculate your self-employment taxes, which include both Social Security and Medicare taxes. To do that, add up your net income and subtract 15.3% from it. That’s the amount you should file. 

Step 4: Report Your Income and Expenses

Once you have all the available information and paperwork, the following step is to submit your reports to the IRS so you can pay the taxes you owe. 

How to Pay Taxes as an Independent Contractor

To pay taxes as an independent contractor, you can go through one of the following options:

Option 1: Online Payment through the IRS

Sign into your IRS account. If you don’t already have one, you can sign up here.

Through your account, you’ll be able to view the account you owe and your payment history. You can then pay your taxes through your checking or savings account. 

Option 2: Payment Through Mail

To pay through mail, you have to prepare a check or a money order payable to the U.S. Treasury. Your check/money order should contain the following information:

  • Name and address
  • Social security number
  • Tax year
  • Daytime phone number
  • Related tax form or notice number

Write down your due amount and mail your check/money order to the appropriate address.  

Option 3: Payment Through Phone

You may call a debit/service card provider that works with the IRS and have them pay your taxes.

Keep in mind that you’ll have to provide some information and that you’ll pay a small fee to use this service. 

Frequently Asked Questions

How Much Can You Make on a 1099 Before You Have to Claim It?

There’s no limit on how much you can make on a 1099 before you have to claim it. Regardless, you need to report all of your business income to the IRS, whether it’s from a 1099 or not.

Is it Hard to File Taxes as an Independent Contractor?

Filing taxes as an independent contractor can be a bit more complicated than filing taxes as an employee. However, it’s still learnable and doable once you understand the steps.

Do Independent Contractors Get a Tax Refund?

Yes, independent contractors can indeed get a tax refund.

That happens when the contractors overpay their taxes throughout the year by paying too much in estimated tax payments or when there are more deductions than income. 

Do You Get a W-9 Form as an Independent Contractor?

No, you don’t get a W-9 form as an independent contractor.

These forms are used by businesses to collect taxpayer information from their employees, which isn’t something that independent contractors should worry about. 

Should You Hire a Pro to Do Your Independent Contractor Taxes?

Hiring a tax professional to do your independent contractor taxes or give you tax advice isn’t a must, but it can save you a lot of time and headaches.

This is especially helpful in handling the complexity of the whole procedure. 

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